Monday, September 26, 2005

Annual Credit Report

Category: Financial Planning

Under Federal Law, you are entitled to one free credit report every year. In the age of identity theft, it is critical that you are aware of the extent of your credit and history of use. You can download your free credit report at www.annualcreditreport.com , the website established by the three national credit agencies (Equifax, Experian, and Trans Union) to satisfy this law.

Thursday, September 15, 2005

5 (Early) Year-End Estate and Financial Planning Tips

Category: Estate Planning, Estate and Inheritance Tax, Financial Planning,
Some tips to think about now to put your estate plan and finances in a better position come 2006:

1. If over 701/2, convert from traditional IRA to Roth IRA
2. Name a charity as beneficiary of an IRA
3. Take more than Required Minimum Distribution from IRA and buy life insurance
4. Give gifts/fund 529 plans
5. Review your assets and domicile

Robert Powell: Top 5 (early) year-end estate-planning tips - General News - Personal Finance describes each of these tips in detail.

Monday, September 12, 2005

Grandma's Got A Boyfriend, Now What?

Category: Estate Planning, Financial Planning

Grandma's Got A Boyfriend, Now What? - Forbes.com takes a look at some financial and estate planning issues facing older adults who are combining households but have grown families. A person in this situation needs to consider the competing desires of providing for their new spouse, or their children or other descendents. These can be incredibly difficult decisions to make, from who is going to get what to who will be the fiduciary to make medical or financial decisions, or to act as Executor or Trustee. Being that these are situations where there are two factions (new spouse and existing children) that have economically opposed interests, these are also situations ripe for litigation. Furthermore, the cost of long term care becomes an issue as each spouse is responsible under the law of most states to provide care for the other spouse, a potentially financially draining issue.

While the issues facing older adults as they combine households are not easy ones, they can be minimized with some honest conversations and pro-active planning. Some questions to consider:

* Who is being named on the Living Will/Health Care Proxy to make medical decisions? Consider the Schiavo case where there were two warring factions over health care decisions.

* Who is being named on the Power of Attorney? You need to consider that you will have ongoing joint expenses with your spouse, but that your children will be concerned if they cannot participate in your finances if you are incapacitated. You may want to consider naming your spouse and child together.

* Who is a joint owner of assets? Joint assets pass to the surviving owner on death, regardless of what the Will says. So, if you have a joint account with a child, that child receives those assets, not your spouse. Similarly, if you own your house jointly with your spouse, it passes to your spouse on death, regardless of who paid for it.

* Who receives your assets at death? You will need to balance the welfare of the surviving spouse versus that of your children. Also, there may be tax considerations in that assets passing to a trust for your spouse may be able to defer the eventual taxation of those assets. Some people get paralyzed by this decisions between two camps of loved ones - you need to remember that if you don't make a will, the state will divide your assets as it sees fit.

* How will long-term health care costs be paid? In most states, a person is responsible for the health care and support costs of a spouse. This can be a considerable issue for seniors, as long-term care costs can bankrupt a person. Also, a wealthier spouse's assets would be at risk due to the health care of a less wealthy spouse. Once answer for this is to purchase and maintain long-term care insurance. Where one spouse is wealthier then the other, it might even make sense for that spouse to foot the bill.

Friday, September 09, 2005

Savings Bonds (Part 2) - What Happens when the Bond Owner Dies?

Category: Estate and Inheritance Tax, Tax Law and Planning, Probate and Estate Administration, Financial Planning

Savings bonds are a ubiquitous asset. However, dealing with savings bonds as part of an estate can in many ways be more complicated then dealing with other investment assets, such as mutual funds, stocks and bonds, where a broker can coordinate transfer and liquidation efforts. In a prior post Saving Bonds (Part 1) - Learning More about those Bonds - I discussed resources to learn more about the value of any bonds. Here, we are looking at what to do with the bonds as part of an estate, or if you inherit bonds as a result of a person's death.

A few general rules, regardless of what series of bonds (E/EE, H/HH or I):

  • Single Ownership: If the savings bonds are owned by one person, and that person dies, the bonds are now owned by the person's estate. The executor, personal representative, or administrator, as the case may be, is the only person authorized to deal with the bonds after a person's death. This means that a probate proceeding will need to be opened so that a person is named by the court to liquidate or transfer title to the bonds.

  • Joint Ownership: If the bonds have co-owners, and one owner dies, the bond now belongs entirely to the co-owner. The co-owner may now liquidate the bond, change title to his or her own name, or change title to the surviving owner and another person of the owner's choosing.

  • Named Beneficiary: If the bond owner named a beneficiary to the bonds on the bonds (not through her will) then upon the bond owner's death, the bond ownership is automatically transferred to the beneficiary. The named beneficiary may now liquidate the bond, change title to his or her own name, or change title to the named beneficiary and another person of the beneficiary's choosing.

  • Estate Tax Consequences: Where the bonds are owned by one person (or by one person who names a beneficiary), 100% of the value of the bonds as of date of death is includible in a person's taxable estate. Where the bonds are owned by more then one person, there is a presumption that 100% of the value of the bonds is includible in the taxable estate of the first person to die. This presumption can be rebutted if the surviving co-owner actually contributed money to buy the bonds. The more likely scenario is that grandma bought a bond naming grandchild as co-owner with grandma's money. In this situation, 100% of the value of the bond on the date of grandma's death is included in her estate, even though she had a co-owner.

  • Income Tax Consequences: Interest income on bonds is generally reported only when the bonds are cashed, disposed of (note: a change of ownership is considered a "disposition" of the bonds and interest accrued to that date must be reported at that time), or reach final maturity. Unlike other types of investments, there is no "step up in basis" for savings bonds, and the accrued, but as yet untaxed income, must be reported as some point by the estate or the beneficiaries.

    If a person owned bonds in their own name with no beneficiary, reporting the interest on those bonds for federal income tax purposes is the responsibility of either (a) the estate if the executor, personal representative, or administrator as the case may be, redeems the bonds; or (b) the beneficiaries of the estate if the bonds are transferred to them as new owners, in the year in which they redeem bonds or the bonds reach final maturity.

    Where there is a co-owner or beneficiary named, the co-owner or beneficiary is the new owner and as such is required to include on his or her return interest earned on the bonds for the year the bonds are redeemed or disposed of (including re-registration by substituting a new owner for the original living owner) or the bonds reach final maturity, whichever occurs first. Alternatively, even when there is a surviving co-owner or beneficiary, the person filing the decedent's final 1040 has the option of reporting on that return all interest earned on the bonds to the date of death. This option might be used where a person on a low income tax bracket has died, leaving the bonds to a person in a higher tax bracket.


The Bureau of Public Debt, on the Treasury Direct website, has detailed articles specifically outlining how savings bonds are to be treated in the event of the death of a bond holder.